Fearing Default, Money Funds Shun Short-Term U.S. Debt

By Michael Aneiro

The prospect of a U.S. default still seems pretty far-fetched for now, but fears are mounting and starting to show up most visibly in the market for short-term U.S. debt. Tim McLaughlin and Ross Kerber of Reuters report today that some of the biggest money market funds, including those run by Pimco, Federated Investors and Fidelity Investments, are staying away from government debt that matures in the next few months and keeping more cash on hand to guard against any delays in the U.S. paying its creditors:

So far, investors have not been rushing to yank their money from the funds, as many still expect that Republicans will come to an agreement with Democrats over the nation’s borrowing limit and avert a default. The U.S. Treasury expects to exhaust all of its remaining borrowing capacity by October 17.

But if the United States fails to raise its debt limit and repay maturing debt, panicky investors may look to raise cash, in part by withdrawing from their money market funds. The funds would have to find ways to pay back their investors, either with cash they have on hand or by selling assets. The industry could face one of its biggest tests since the financial crisis forced the government to provide emergency support to the industry.

Meanwhile, yields on one-month T-bills, a form of short-term Treasury debt, have skyrocketed this month, as Cynthia Lin writes in the Wall Street Journal‘s MoneyBeat blog today:

T-bills maturing around Oct. 31 declined in price on Tuesday, sending the one-month yield as high as 0.322%, the highest since 2008. The yield started the month at 0.02%. Worries about the government shutdown delaying an agreement to lift the debt ceiling is keeping conservative money managers away from short-term bills, as they worry that the U.S.’s inability to borrow more money may delay payments on debt due in the coming month.

Investor concerns seem to be limited to these securities at the moment, even as little evidence exists that Republicans and Democrats will hammer out a compromise on the partial government shutdown. The yields of longer-term bills, those maturing in three, six and 12 months, remain near zero, and the yield on the 10-year note has been holding steady, recently 2.63%.